European Financial Crisis Set To Drag Down Airline Profits

Next year appears likely to present harsh trading conditions for Greece's Aegean Airlines among many other European carriers.

Airlines appear headed for another bumpy ride in 2012, according to the International Air Transport Association (IATA), which last week slashed $1.4 billion from its forecast profits for member carriers. At an estimated $3.5 billion, airline profits next year would account for a net margin of just 0.6 percent—compared with an anticipated 2011 net margin of 1.2 percent on total profits of $6.9 billion.

IATA’s pessimism stems mainly from the financial crisis in Europe. The group reckons that if the situation deteriorates into a large-scale collapse of the banking system and a descent back into recession, the global air transport industry could incur an $8 billion loss next year. With Europe’s airlines already tagged as 2012’s big losers, IATA sees operators in the still-growing Asia-Pacific region accounting for 60 percent of global airline profits, at $2.1 billion. As world airlines face what IATA estimates will amount to a 4.5-percent rise in costs next year, revenues will increase by only 3.7 percent.

Beginning in 2013 air travelers in the UK face an 8-percent rise in the already-stiff air passenger duty paid on tickets. The British Air Transport Association has accused the UK government of conducting a bogus consultation on the issue that did not take any meaningful account of the negative effect on the industry—wasting its members’ time when it had already determined the outcome.

Meanwhile, the European Commission (EC) has published proposals to reform slot allocation rules under its so-called Airports Package. Details of legislation to be put before the European Parliament next year remain somewhat sketchy, but it essentially raises the “use them or lose them” rule under which carriers must use 85 percent of their existing slots or risk losing them to others, compared with the current requirement of 80 percent. The new rules aim to provide a “transparent” way airlines to trade airport slots.

The EC also has committed to opening competition for ground-handling services and overhauling the way regulators establish noise limits for airports in the European Union. IATA reserved judgment on whether the Airports Package will achieve the desired improvements in competitiveness and airport capacity, while the European Regions Airline Association dismissed the proposals as a “missed opportunity.”

The Association of European Airlines said that underused slots amount to a “symptom, not the cause” of Europe’s airport-capacity problems.